What is a Lot Loan?

A lot loan is money that is temporarily given from a lending company or bank to a borrower who is looking to build a primary or secondary residence. The money from a lot loan is used to finance the purchase of the land that the borrower will build on.

A lot loan is different that a construction loan because the lot loan pays for the land that the construction will take place on. A construction loan is money the finances the actual construction of the home including man power and materials. Certain lenders are willing to transfer lot loans into construction loans when the borrower is ready to build. The progression from a lot loan to a construction loan can extend into a home mortgage if the borrower wishes the finance the home once the construction is complete.

The terms of a lot loan vary depending on the lending company. Lot loans are available with fixed or adjustable interest rates. Although the term is usually short, the specific term of the loan will depend on the company. Monthly payments for lot loans can include interest only or interest and principal. Usually lot loans are paid in one lump sum to the borrower.

Lenders will stipulate the monetary limits of a lot loan, requirements for acreage, and also what qualifies as an acceptable lot. Whereas land loans can be used for undeveloped pieces of property, lot loans usually need to be in an area that is considered potentially residential.